Monday, July 24, 2017

Building A Mortgage Meltdown For The Rental Market

Is the private sector allowed to do anything anymore? For nearly 80 years, Washington has subsidized homeownership — creating massive distortions both in house prices and in what neighborhoods look like. Now the feds will subsidize rental homes as well — expanding government control over even more of the economy.

The American home-buying world doesn’t even resemble a free market. Americans owe $10.3 trillion on mortgages. Fannie Mae and Freddie Mac, the government-guaranteed mortgage giants, hold $5 trillion of that debt. The Federal Reserve holds another $1.8 trillion. Smaller government entities like the Federal Housing Administration and Federal Home Loan Banks round out the government sector.

Government guarantees and direct lending keep mortgage rates low. They also keep home prices high, because the cheaper you can borrow, the more you can pay for a house. They discriminate against cities, where most people rent, not buy.

And they’re not good for the environment. Government subsidies of large single-family homes mean suburban sprawl and long commutes.

We put up with all of this in the spirit of “encouraging” homeownership. The idea — not backed by much evidence worldwide — is that when you own your property, you’ll be a better citizen and help create a more stable community.

This is the American creed, right or wrong, and we’re going to stick to it.

Or not. Freddie Mac wants to provide $1 billion to medium-sized landlords for rental housing, The New York Times reports. This, just a few months after Fannie issued its own $1 billion guarantee for Blackstone, a huge rental-property owner.

Both agencies have long done some rental housing for small-property owners, but this is a big expansion. You can bet Fannie and Freddie will want to expand this new lending, too, well beyond $2 billion.

The idea is that cheaper loans will make rental housing more affordable, just like with the mortgage market.

So, it turns out, never mind about the past 80 years — homeownership wasn’t so important after all. The government is now going to subsidize every kind of housing, and people can make their own choices about where to live.

That’s a radical idea — but if Washington is going to subsidize everything, why not subsidize nothing? The result would be the same: a fairer playing field.

Another claim is that banks aren’t lending enough to rental-property owners, constricting supply. But that’s not true: construction and land-development loans are up nearly 50 percent in the past two years.

And perhaps the banking system isn’t working because of too much government interference, not a lack of it.

If a bank wants to lend to a rental builder, it must set aside 4 percent of the value of the loan in capital reserves to cover losses. If the bank wants to lend to a homeowner via Fannie or Freddie, it must only set aside 1.6 percent. Capital costs money — so banks naturally prefer to make the easier and cheaper loans. The government should change these regulations, and see if private banks will lend more.

Having the government jump directly into this market creates the risk that banks will do even less lending to rental builders. The government can offer cheaper financing, making it harder for private lenders to compete. In the years leading up to 2008, Fannie and Freddie’s dominance of the mortgage market encouraged banks to make ever-riskier mortgages to grow their own businesses.

The big picture, though, is the definition of a reasonably functioning free-market economy: If you want to buy a house, you should be able to find someone willing to lend you the money to do so, provided you have the resources to repay the loan.

If you want to rent an apartment, you should be able to find someone to rent you an apartment, whether you can afford modest rent or high rent. Likewise, the apartment owner should be able to find a lender, based on your rental income.

The government should target subsidies only to people who can’t work because of disability or age, and give temporary help to others — not declare the entire market broken and take over.